Santa Fe Gives Up On Rail Merger

2d Rejection By Icc Ends 3-year Fight

July 01, 1987|By Carol Jouzaitis.

Santa Fe Southern Pacific Corp. surrendered in its 3 1/2-year battle to merge its two railroads Tuesday after the Interstate Commerce Commission voted for the second time to reject the proposed merger.

The commission, which had rejected the rail combination a year ago, voted 4-1 against reopening the case. The decision will force Santa Fe Southern Pacific to sell at least one of its rail systems, Santa Fe Railway Co. and Southern Pacific Transportation Co.

Santa Fe Southern Pacific officials said they wouldn`t appeal the outcome in court and would begin preparing a plan to divest one or both lines.

The company also unveiled a separate plan to sell six subsidiaries in the pipeline, construction and real estate businesses.

The rail and other spinoffs could reap $2 billion or more for Chicago-based Santa Fe Southern Pacific, analysts estimated.

Wall Street reacted favorably to the developments. Santa Fe Southern Pacific stock jumped $3.75 to close at $50 in heavy trading on the New York Stock Exchange.

``The company is being restructured. People increasingly think it`s going to be taken over,`` said Jeffrey Stone, analyst at Wertheim & Co. in New York. Since the merger was first denied, the company has taken steps to significantly reduce the work forces and trackage of the Santa Fe and Southern Pacific.

Both have been struggling under competition from larger systems, and employee morale has suffered because of the lines` uncertain futures.

``We believe the employees of these two railroads have been held in suspense long enough,`` John S. Reed, chairman and chief executive of Santa Fe Southern Pacific, said of the decision not to appeal.

Santa Fe Southern Pacific is still weighing ``numerous options that are available to us as far as rail divestiture is concerned,`` Reed said. Reed emerged from retirement to retake the company`s helm after John Schmidt was ousted in April.

Reed indicated that he would prefer to keep one of the lines, contrary to speculation that without the merger the company would get out of the rail business.

``The decision means that we`re simply back to square one,`` Reed told reporters, ``running one railroad or the other, or conceivably neither.

``As of now, we`re going to concentrate on transportation . . which would mean retaining one (rail) company, in my opinion.``

Reed indicated that a decision to keep one of the railroads--he declined to say which one--would hinge on getting cost-saving concessions from labor.

``We believe that the railroad business can be good for our shareholders, provided substantial changes are made in operations that will result in improved returns,`` Reed said.

The company will ``weigh the opportunities for making these changes against the opportunities that may arise for selling both railroads on favorable terms,`` he said.

``We expect to work closely with our labor unions to develop programs that will increase productivity and reduce the cost of providing service.``

Shortly after its meeting in Washington, the ICC ordered Santa Fe Southern Pacific to file a divestiture plan within 90 days. The company will likely have up to two years to complete a railroad sale.

Meanwhile, Kansas City Southern Industries renewed its offer to purchase the ailing Southern Pacific and said it would present a formal cash bid within 60 days.

Burlington Northern Railroad Co. also announced it was interested in acquiring portions of the lines.

Southern Pacific, based in San Francisco, is considered the line most likely to be sold. After the railroads` parent companies merged in 1983, Southern Pacific was placed in a voting trust, pending a decision by the ICC, to insulate its operations from Santa Fe`s.

The ICC decision came despite a recommendation from its staff to reopen the case.

Commission members voting in the majority said anticompetitive conditions that caused them to originally reject the merger still exist, even in view of trackage rights agreements that

largely settled objections from rival lines.

``What has been termed as new is, in my judgment, little more than a change in position,`` said Commissioner Paul Lamboley. ``I don`t think there`s really a change at all.``

For the second time, ICC Chairman Heather Gradison cast the sole vote in Santa Fe Southern Pacific`s favor.

Gradison cautioned that the decision posed a ``serious and broad`` threat to other potential rail mergers.

``It means let the buyer beware,`` Gradison said. Reconsideration was denied, she complained, ``not because this was a bad merger but because there is the feeling that there is a better merger proposal out there somewhere.``

Meanwhile, the realignment is intended to put the focus on the company`s core businesses. After an intensive review, the company has identified those areas as natural resources, real estate and transportation, including pipelines for refined products and railroading, Reed said.